In 2010, Chinese President Hu Jintao pointed out that China should aim to “build a strong, smart, highly efficient and reliable grid system that covers both urban and rural areas.” Since then, he has frequently asserted the goal of energy independence in relation to smart grid deployments.
According to recent reports from the Chinese media, the deployment of smart meters is swiftly ramping up and will reach around 230 million units by 2015. While actual progress could fall short of this huge number, it’s undeniable that the actual number will be significant compared to other regions.
Even so, the question remains: how will China achieve its goals in terms of the strength of the market, as measured by the qualitative scope and success of the market players, not just by those stunning quantitative volumes? Will China’s smart grid program be strong in this sense as well as in sheer numbers?
Several challenges are evident. For one, the major Chinese utilities (The State Grid Corporation of China (SGCC) and China Southern Power Grid) are not entirely consistent in smart meter standards. Second, China is quite fragmented, with different versions of local communication protocols, different functional requirements for installation, usage, and management in smart meters, with over 300 types of meters in use by local regions. While China has already formed a standards body, associated with the China Electric Power Institute (CEPRI), cooperation and broad-based standards are still lacking.
Therefore, the surprising number of smart meters announced and currently being deployed in China might not be the real issue. The state-owned utilities must tackle the fragmentation that could impede the progress of Chinese domestic metering markets. For smart meter manufacturers, the lack of uniform standards could lead to inefficient, duplicative, and waste of resources in R&D investment. Accordingly, the delay of the standards will push back the time frame for mass production. Eventually, Chinese companies in the smart metering industry are vulnerable to low margins and falling competitiveness.
Already, the ultracompetitive bidding process for Chinese smart meter vendors has started to winnow the weaker players. Since 2009, China has had successive plans and procurement cases with multiple bidding processes each year. More than 70 Chinese meter manufacturers have participated in the bidding, but only 30% of these participants eventually sign deals, making for a very competitive market landscape.
Given the keen competition, some big players such as Ningbo Sanxing are actively working with the two major utilities to differentiate themselves from their competitors. This close cooperation with utilities includes discussions on product design at the earliest stage, along with quality control and joint R&D.
As a result, smaller vendors will face big challenges in making their technologies competitive unless they secure similar relationships with utilities. Even more important for the small players is the issue of cost competitiveness. Aggressive bidding has driven vendors’ margins close to zero.
To build a truly strong and competitive industry, China needs a positive market environment with a high degree of cooperation in smart meter standards. This is a necessary condition for vendors to survive in the Chinese smart meter arena. Announced numbers of deployments are not the best signal for the development of a strong, sustainable industry.